American farmers breathed a sigh of relief on March 7 when US negotiators announced that they had achieved a breakthrough regarding Beijing's attempt to limit the import of genetically modified foods.
"We're pleased that China appears to appreciate our concerns and has said that it is developing an interim arrangement to reduce trade disruptions," said Ann Veneman, US agriculture secretary. "It's a step in the right direction."
Under the plan, on March 20 China was to begin enforcing the import rules for genetically modified organisms (GMOs) that would require importers or exporters to obtain certificates from the Chinese government certifying that their foods are safe.
It has introduced temporary measures that involve less paperwork and offer much quicker approval of safety certificates compared with the original rules. The GMO approval period will be slashed from 270 days to 30 days. The temporary agreement is expected to ensure that exports of herbicide-resistant bio-engineered soybean produced in the US will not face any problems coming into China.
American critics had denounced the Chinese plan to implement rules on GMO foods, saying the new regulations were vague and aimed at slowing down imports following China's entry to the World Trade Organisation. American agricultural officials argue that there is no scientific evidence showing a risk from the modified soybeans.
However, the Chinese appeared to be following the example of the EU, which has imposed a moratorium since 1998 on the approval of new varieties of crops with GMOs, under pressure from consumer and environmental groups who argue that more research needs to be done to prove such foods are safe. Chinese agriculture experts denied that the move was protectionist, saying the aim was to ensure the safety of Chinese consumers.
Had the rule been implemented it would have had a significant effect on US exports. About 70 percent of US soybeans are grown from genetically-modified beans, with exports to China running at US$1bn a year.
When China joined the WTO in December, analysts predicted the country would erect barriers to foreign competition in the ailing and inefficient agriculture sector, where China fears a flood of imported farm goods could fuel rural unrest. CLSA China economist Andy Rothman in a report entitled China's Rural Crisis believes China is determined to implement "most" of its commitments to open markets and lower tariffs. However, he adds that "we also expect Beijing to act like all other WTO members and revert to protectionist measures when key domestic interests are threatened. The question we can't yet answer is how often China will give in to those domestic pressures."
WTO entry poses a serious challenge to the government, which is hoping that foreign competition will spur the sector, while at the same time being worried about the repercussions.
Agriculture is still the major source of income for half of China's 1.3bn people, and there are signs of a growing deterioration in rural living standards. China's Ministry of Agriculture in February estimated that there were 100m surplus rural labourers out of a total rural population of about 900m. The Labour Ministry says 20 percent of the country's farmers are unemployed. Making matters worse, rural incomes have been declining, while illegal fees and arbitrary taxes are rising. Premier Zhu Rongji said recently that local officials were collecting Yn30bn in illegal fees each year. Over the past year, the state media has reported a number of farm protests, a phenomenon that the Communist Party is watching nervously.
Zhu's annual work report to the National People's Congress included an unprecedented emphasis on the rural problem, and promises to raise incomes for farmers. One NPC deputy said that the WTO accession had sent "shock waves" through the rural population. "Price hikes of farm products last year contributed about two percentage points to farmer income growth," one delegate told China Daily, "but the high prices also put farmers in a disadvantageous position after the country's WTO entry."
Cancellation of corn imports
Although China is not a major consumer of foreign corn, its importers have cancelled 720,000 tons of US corn purchases made this season. China did not say whether the cancellations were related to GMO concerns. However, some 20 percent of US corn is grown from biotech seeds, and US industry sources cited concerns about red tape and problems related to GMO regulations.
As a new member of the WTO, China has lowered tariffs on meat, but Washington says that tougher quarantine and customs enforcement measures adopted by Beijing are ?unsupportable scientifically? and will ?unduly restrict trade and create friction with trading partners.?
?Trading partners are questioning the validity of the restrictions in some cases,? the United States Agriculture Department (USDA) said in its semi-annual report on China's meat and livestock products. The report, which was published in February, said that China had in recent months rejected pork offal from the EU and Canada and poultry meat from the US ?based on zero tolerance levels for E. Coli and salmonella. In these cases, zero tolerance does not conform with accepted international standards.? China has also put indefinite bans on poultry from the US east coast states of Connecticut and Pennsylvania, where low-pathogenic avian influenza broke out recently.
Despite the alleged barriers, a USDA economist says China's WTO membership will boost US agricultural exports significantly. The expert cited increased exports resulting from accession and higher crop prices for the increased values. The USDA predicts China will boost imports of corn by about US$500m a year, wheat by about US$400m and soybeans, soymeal and soyoil by US$300m.
Wang Xiaolu, deputy director of the National Economic Research Institute, says China will have to restructure its agricultural sector in order to survive the WTO shock. He suggests that grain should be replaced by other agricultural products, especially cash crops such as vegetables, fruit and tea. Wang says that the share of the total sown area for grain has fallen from 80 percent to 69 percent over the past 20 years, adding that the government has abolished grain quotas in the major grain-importing coastal provinces.
Price supports are ruled out under WTO commitments and this should have a positive effect on the sector. "Past experience indicates that government protection of grain prices has had a negative impact on farmers' incomes because it has distorted market prices and sent the wrong signals to producers," says Wang. "Government grain prices set at levels higher than market prices encourage farmers to produce grain in excess of market demand, eventually resulting in market surpluses and declines in prices."
Rothman argues that, contrary to conventional wisdom, WTO will not be a disaster for the countryside if China's farmers can make the transition from grains to high value-added fruits and vegetables. This will require access to technical skills needed to produce such products and access to capital for the initial infrastructure investment.
He says the pain of WTO membership will be cushioned by steps China has taken over the past two decades to make its economy more responsive to market forces. During this period, China has slashed its import duties from an average of 50 percent to 15 percent, within the range of most developing countries in the WTO.
Furthermore, he says the state has been withdrawing from the domestic marketplace as well. While 94 percent of agricultural commodity prices were set by the government in 1978, this proportion had fallen to only 17 percent by the late 1990s. One such example of reduced state control is cotton, a commodity in which China is the world's biggest producer and consumer. During the 1999/2000 crop year, China for the first time did not set an official procurement price, leaving it up to the market. The government also abolished its monopoly on cotton purchase and sale.
Rothman says the main reason WTO will have only a "moderate impact" on the rural economy is that China will not be flooded by foreign grain. He says that after entering the WTO, quotas will tightly restrict the amount of foreign grain that enters the Mainland through tariff rate quotas, a two-tier tariff system adopted during the Uruguay Round of the GATT, predecessor to the WTO. Under this system, a limited amount of imports are allowed to enter the country at a low tariff, and all additional imports come in at the higher tariff, which is often prohibitively high. More than one quarter of WTO members employ this quota system.
CLSA says China will use the system to protect its most important agricultural commodities: wheat, corn, rice, oilseeds, sugar, wool and cotton. "The quantity of these imports that will be allowed in under the low tariff will be so low that it should not have a significant impact on domestic prices or farm incomes," says Rothman. The economist points out that grain coming in above the lower tariff would be taxed at 65-77 percent, "high enough to ensure that China is not flooded by imported grain."
Wang also advises adjustments to increase export of labour-intensive products with low land intensity. "To achieve this, major efforts will be needed, especially for remote land areas, to develop business connections with world markets, and also to develop related human resources, infrastructure and other facilities." Wang concedes this will take time, but that this is necessary to modernise China's traditional agriculture.
Chinese economists have also called for a significant transfer of agricultural labour to the industrial and service sectors, arguing that farming can no longer support such a large proportion of the population. China has at least 200m more farmers than it needs. At present, only 36 percent of the total population lives in urban areas, 10-20 percent lower than in other countries with the same level of per capita GDP.
One problem is that urban unemployment is rising sharply and there will not be nearly enough jobs to absorb the millions of untrained rural workers who will be seeking to enter the urban economy annually in coming years.
China's move to open its markets is a sign that the country is making the right moves. The question is whether it will have enough time to make a smooth transition.